Bank of Canada: The case for a 50 basis point rate cut firms up after a drop in CPI

A surprise drop in Canadian inflation to just 1.6% y/y has reignited bets that the Bank of Canada will lower rates by 50 basis points later this month. Canadian September CPI was expected to fall to 1.8% from 2.0% but tumbled further below the central bank’s target.

USD/CAD rose about 15 pips in the aftermath of the report and is on track for a tenth straight day of gains.

In light of the softer inflation report, market pricing for a half-point BOC cut rose to 67% from 48% before the data.

It may have risen further if not for some of the caveats in the report. The bulk of the miss was driven by gasoline prices, which central banks tend to look past. WTI crude traded as $95 in September 2023 and traded in the $65-$73 range this September.

The BOC core CPI measure ricked up to 1.6% y/y from 1.5% though both are well-below target. However the measures of median, trim and common CPI were all largely unchanged on the month:

• Median 2.3% versus 2.3% prior
• Trim 2.4% versus 2.5% prior
• Common 2.1% versus 2.0% prior (prior revised to 1.9%)

Also cushioning some of the blow from the CPI report was a wholesale sales reading at -0.6% compared to -1.1% expected, adding some light upside risks to Q3 GDP.

Overall though, the case for a 50 basis point cut this month is compelling. Canadian housing is struggling — particularly in Ontario — and with inflation near target, there is no need for overnight rates to be at 4.25% or anywhere near that level. What’s restrained the market from pricing in more-aggressive easing is the resilient performance in the US economy and the potential spill-overs to Canada. The market is also carefully watching China for signs of large fiscal stimulus, something officials have been teasing at.

The next Bank of Canada rate decision is October 23.

This article was written by Adam Button at www.forexlive.com.